Betting that individual stocks will be volatile while the S&P 500 stays relatively calm has been a popular and successful hedge fund strategy. Known as dispersion trading, the approach profits from the gap between index volatility and single-stock volatility.

But with swings in share prices reaching extreme levels, the reverse trade is gaining traction with investors. In a reverse dispersion trade, funds bet that the S&P 500 will become more volatile than its components, a wager that pays off when macro shocks hit the broad market.

Recent data shows the Cboe Volatility Index (VIX) trading at a premium to single-stock volatility measures, a rare condition that signals rising correlation risk. Hedge funds including Citadel and Millennium are reportedly allocating capital to this strategy, according to Bloomberg Markets.

The shift reflects growing concern that 2024's concentrated rally in mega-cap tech stocks has left the index vulnerable to a synchronized selloff. As one portfolio manager noted, "When correlations spike, dispersion collapses, and the reverse trade becomes the only hedge that works."